LISTEN: Cazenove Capital MPS Q1 Update

Cazenove 2020 Q1 MPS update

This audio is marketing material for UK investment professionals only

Welcome to the quarter 1 2020 update for the Cazenove Capital model portfolio servers. I’m Gillian Hepburn and I’m responsible for Intermediary Solutions at Cazenove/Schroders, I‘m joined today by Steven Rooke, the portfolio manager for the models.

We are going to discuss what’s been happening in markets during these very difficult times, and talk about how the portfolios have fared, any changes that we have made and the current positioning.

Steven, Equity markets sold off heavily in the first quarter, how did this play out?

So we saw a health crisis develop into a global economic crisis in a very short space of time.  Once it became clear that this was a global pandemic and not confined to just China, equity markets fell rapidly, quickly entering bear market territory, characterised as a fall of over 20%.  The falls were exasperated in early March by a collapse in the oil price, as an expected cut in oil production from the major producers failed to materialise and instead saw production ramp up following a spat between Russia and Saudi Arabia.

Which areas of the market were hardest hit?

Cyclical companies, so those most exposed to the economy, and in particular those carrying too much debt were punished.  Towards the end of the quarter we also saw greater pressure on the less liquid parts of the market, namely small and mid cap stocks.  Government enforced lockdowns to help stop the spread of the virus decimated a number of industries, particularly leisure and tourism.  Whilst energy stocks were impacted by the dramatic drop in the oil price.

How has the sell-off affected our expectations on global growth?

The Schroders economics team are expecting GDP growth to fall by 3% this year, with a strong rebound in 2021 of around 7%.  Authorities have learned from the Great Financial Crisis and reacted quickly, both central banks by cutting interest rates and extending quantitative easing and governments who have provided support to healthcare systems, to individuals through the use of furloughing as well as loans and guarantees to companies which should help boost the return to growth.

There has been a lot of talk about the shape of the recovery, could you tell us what our view is?

Yes, so the shape of the recovery will depend on whether the pandemic can be brought under control.  Equity markets are viewing a V shaped recovery as the likely scenario, with a short recession and subsequent rebound.  What could clearly hamper this is if we see a second or third wave of outbreaks or the coronavirus lingering longer throughout the year which leads to a W shape recovery or even an L shape.  Much of this will rest on greater use of testing, restricting movement, the use of existing drugs to treat the virus and the ultimate goal of a vaccine.  We are closely monitoring this, but as it currently stands we are thinking base case is a V shape but not certainly not discounting a W.

Thanks for that, lets look more specifically at the models, how has the range fared?

During this risk off period, models with lower equity content understandably performed best.  Within equities, our funds with a bias to quality growth compounders such as Trojan Income held up well on a relative basis.  Our direct China exposure via Allianz All China and China A Shares were down less than 2% despite China being at the epicentre of the outbreak, with the economy there having restarted as virus cases peaked in February.  The tech sector has been the go to sector, with our position in T.Rowe Global Technology benefitting from positions in the likes of Netflix as people binge watch films and box sets and Zoom Video Communications which has seen a huge uptick in usage as businesses make use of video conferencing and people keeping in touch with friends and family during lockdown.   Within Fixed Income our best performers were our inflation linked government bonds as well as short dated corporates, whilst high yield struggled as credit spreads widened - so that’s the difference between government and corporate bond yields, due to the growing risk of defaults.  Our alternatives helped dampen volatility and provided diversification benefits, with the Janus Henderson UK Absolute Return fund and Troy Trojan funds both protecting capital, with gold which is held in cautious and balanced models up strongly as well.

And what about the sustainable models

We benchmarked the sustainable models against the core models as we believe investors do not have to compromise on returns by investing in a sustainable way, the sustainable models actually held up slightly better than the core models with a quality bias that you associate with businesses that have ESG at the forefront of what they do a key factor.

So that’s a really positive message for people who believe that there might be a performance drag on their investments if they want to invest sustainably, so in terms of changes, can you run through the rebalance that you have made this year

Yes so in January we banked profits in the FTSE 250 tracker that we tactically added in November ahead of the general election and reinvested the proceeds into Polar Healthcare Opportunities, with healthcare one of our long term themes we are playing in the models, and we also added it to a global equity tracker with equity markets then selling off heavily we rebalanced the models at the start of April adding to our overseas equity exposure as well as increasing the quality of bonds via a UK gilt index.  So here we are looking to balance the volatility that we expect to continue in this fast moving health crisis providing protection in the event of a W shaped recovery, whilst also taking advantage of equity weakness and looking forward to the anticipated economic recovery.

I think its also worth while pointing out here that whilst the changes were made in January and April which appear to be quarterly that these were actually conscious and active decisions so that there’s freedom and flexibility to rebalance at any point and not just based on a pre-determined schedule.   So could you run us through the current positioning in the models?

We are therefore happy to stay neutral on equities but continue to think bonds looks overvalued and we are therefore underweight, but with a focus there on increasing quality.  We remain positive on alternatives to act as portfolio diversifiers during these volatile times.

Thanks Steven and hopefully that’s really helpful for everybody, its also worth highlighting some other positive developments for the Model Portfolio range, they have continued to add models to further platforms such as Nucleus, Embark, and Zurich and we have more in the pipeline.  We have also reduced the overall cost to clients at the beginning of this year as the VAT has been removed from the management charge and all our material is being updated to reflect this.

So we would like to thank you for your continued support and if you would like any further information then please do contact your local business development manager, and we hope you continue to stay safe and well.